Digital loans, although small in India today, have stuck and there is no doubt that they will become very important. However, with this comes its own issues, mainly due to the greater reliance on third-party loan service providers (LSPs), which leads to sales gouging and a breach of data privacy.
To prepare the country against these, the Reserve Bank of India (RBI) had formed a task force in January 2021 and the group issued its report a few days ago.
It studies the current market situation as well as the potential risks in the digital lending ecosystem and provides recommendations for the regulation of this space, which are driven by principles of technological neutrality protection, formulating an approach based on principles instead of a rules-based regime and addressing the issue of regulation. arbitrage without strangling digital innovation. The recommendations aim to administer a standard protocol for doing business at three levels, namely RBI regulated entities, other regulated / authorized entities and unregulated entities, including third party service providers operating in the financial industry. digital.
Studies reveal important results that underscore the need to step up the game to establish a stronger legal and regulatory framework governing players in the digital lending space. To this end, the Group recommended that a nodal agency be set up to check mainly the technological references of digital lending applications (DLA) of balance sheet lenders (these are lenders who retain the loan and the associated credit risk). on their balance sheet) and LSPs as well as the maintenance of a public register of verified applications.
Balance sheet loans through DLAs are supposed to be limited to regulated entities or entities authorized to provide lending services. The introduction of separate legislation to ban unregulated lending activities, the establishment of a self-regulatory body (SRO) covering participants in the digital lending space are among the other recommendations, under the first pillar of the three-pronged approach.
To maintain transparency on the loan management front, the Group proposes that all loan services, repayments and other related activities be performed directly on a lender’s bank account on the balance sheet without any transfer or pooling account. ‘a third. A similar approach is envisaged for loan disbursement. The booming amplification of short-term credit, deferred payments, and concepts such as ‘buy now, pay later’ through digital channels that do not meet the requirements of traditional credit facilities have been identified as a problem. matter of concern requiring calibration of existing regulations and as a draw-off of this, such provisions are sought to be recognized as part of the loan balance sheet and regulated accordingly.
In addition, the report lays the groundwork for opening up NBFC / digital-only banks and the eventual inclusion of digital / neo-banks as part of RBI regulation. Steps to expand credit reports to enable better credit decisions are also suggested.
With ‘technology’ being a major driver of the evolving fintech scenario, the report’s second set of metrics is anchored in proposals developed to conceptualize a results-oriented regulatory framework on the technology front.
Mandates such as meeting prescribed basic technological standards, storing data on servers located in India, detailed app / website disclosures, as well as increased focus on digitally signed documents are points. strong. From a data governance perspective, the data protection authority proposed in the Personal Data Protection Bill is empowered to oversee financial applications.
India has been a pillar in protecting consumer interests / rights and therefore the third set of measures is advocated to enhance this consumer friendly image. The Group’s report recommends responsible advertising and marketing standards as well as a code of conduct to be implemented by the proposed SRO. Adequate user education and the design of simplified loan products are encouraged to facilitate decision making. In addition, the names of identified unscrupulous lenders should be made available to REs to enable them to exercise enhanced due diligence while allowing clients to use banking / payment / telecom channels. Policies regarding anti-predation loans and anti-usurious loans are encouraged.
Digital innovations as well as the possible entry of BigTech companies have the potential to change the institutional role played by existing financial service providers and regulated entities. If these recommendations become guidelines, players in the digital lending arena, for the most part unregulated, will have to jump on the regulatory bandwagon and may need to overhaul their operational mechanism. Some of them can even be excluded from operations. As the government awaits public comments until December 31, 2021, it is advised that these service providers take a deep look at their business models and acclimatize to the recommendations and suggestions of the task force report, in particular on the technological front. In addition, when reviewing the report, regulators / government agencies should maintain a level playing field to ensure not only fair competition and consumer protection, but also protect the sentiments of digi players given the recommended change in the process. operating environment.
The author is a partner, Nangia Andersen LLP, a law firm